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Chapter 1.

Constitution of
the Sixth Central
Pay Commission

The Government constituted the Sixth Central Pay
Commission vide Resolution No. 5/2/2006-E.III(A) dated October 5,

Terms of


The Terms of Reference of the Commission are as under :

A. To examine the principles, the date of effect thereof that should govern
the structure of pay, allowances and other facilities/benefits whether in
cash or in kind to the following categories of employees:1.

Central Government employees industrial and non-industrial.

Personnel belonging to the All India Services.
Personnel belonging to the Defence Forces.
Personnel of the Union Territories.
Officers and employees of the Indian Audit and Accounts
Department; and
Members of the regulatory bodies (excluding the RBI) set up under
Acts of Parliament.*

B. To transform the Central Government Organisations into modern,

professional and citizen-friendly entities that are dedicated to the service
of the people.
C. To work out a comprehensive pay package for the categories of Central
Government employees mentioned at (A) above that is suitably linked to
promoting efficiency, productivity and economy through rationalization
of structures, organizations, systems and processes within the
Government, with a view to leveraging economy, accountability,
responsibility, transparency, assimilation of technology and discipline.
D. To harmonize the functioning of the Central Government Organisations
with the demands of the emerging global economic scenario. This would
also take in account, among other relevant factors, the totality of
benefits available to the employees, need of rationalization and
simplification, thereof, the prevailing pay structure and retirement
benefits available under the Central Public Sector Undertakings, the
economic conditions in the country, the need to observe fiscal prudence
in the management of the economy, the resources of the Central

Government and the demands thereon on account of economic and

social development, defence, national security and the global economic
scenario, and the impact upon the finances of the States if the
recommendations are adopted by the States.
E. To examine the principles which should govern the structure of pension,
death-cum-retirement gratuity, family pension and other terminal or
recurring benefits having financial implications to the present and
former Central Government employees appointed before January 1,
F. To make recommendations with respect to the general principles,
financial parameters and conditions which should govern payment of
bonus and the desirability and feasibility of introducing Productivity
Linked Incentive Scheme in place of the existing ad hoc bonus scheme in
various Departments and to recommend specific formulae for
determining the productivity index and other related parameters.
G. To examine desirability and the need to sanction any interim relief till
the time the recommendations of the Commission are made and accepted
by the Government.
*As substituted by Ministry of Finance Resolution No.5/2/20006E.III (A) dated the 7th December, 2006.
Additional Term
of Reference

Through a subsequent Resolution No.5/2/2006-E.III.(A)
dated 8 August, 2007, the terms of reference were enlarged to
include the officers and employees of the Supreme Court.


The Fifth Pay Commission had recommended that pay
revision should, in future, be entrusted to a permanent Pay
Commission drawing its authority from a constitutional provision
and whose recommendations, made annually, should have a
binding character. The Commission, as an alternative, suggested
that dearness allowance should be converted into dearness pay
every time the cost of living rises by 50% over the base level. In their
opinion, DA would normally increase by 50% in a period of 5 years
and that this relief could be combined with a decennial exercise of
pay revision through a Pay Commission, meeting partially the
demands of Central Government employees for a more frequent
revision of salaries on the analogy of public sector employees. The
Fifth CPC recommended constitution of the next Pay Commission
by 2003 so that its report was available by 2006. Although the
Government did not appoint the next Pay Commission in 2003, it
allowed merger of 50% of dearness allowance with pay with effect
from 1/4/2004.

Composition of
the Commission

Sixth Central Pay Commission comprised a Chairman and 3
Members as under :
1 Chairman
Justice B.N.Srikrishna
2 Member
Prof. Ravindra Dholakia
3 Member
Mr. J. S. Mathur
4 Member-Secretary Smt. Sushama Nath
Unfortunately, one of the distinguished Members, Shri J.S. Mathur
passed away in February, 2008. The Commission would like to place
on record its gratitude for the immense and substantive
contribution made in the Report by Shri J.S. Mathur.

Special features
of Terms of

Terms of Reference of the Sixth Central Pay Commission are
somewhat different from those of the earlier Central Pay
Commissions. Clause 2 (B) of the Terms of Reference envisages
transforming the Central Government organizations into modern,
professional and citizen friendly entities that are dedicated to the
service of the people. While the earlier Commissions were required
to examine the work methods and work environment and to suggest
rationalization and simplifications therein with a view to promoting
efficiency and optimizing the size, it is for the first time that a
Central Pay Commission has been asked to look into the measures
that would improve the delivery mechanisms which have a direct
bearing on the services provided by various Government agencies to
the common citizens. Further, Clause 2 (D) of the Terms of
Reference makes it incumbent upon the Commission to harmonize
the functioning of the Central Government Organizations with the
demands of the emerging global economic scenario.
The Sixth Central Pay Commission, therefore, had not only
to evolve a proper pay package for the Government employees but
also to make recommendations rationalizing the governmental
structure with a view to improving the delivery mechanisms for
providing better services to the common man. In addition, linking
the pay packages with simplification of systems and processes
within the Government, greater delegation with emphasis on
accountability, responsibility and assimilation of technology, etc.
have been the Commissions guiding philosophy.

adopted to
achieve desired

The Commission, in this Report, plans to achieve these
objectives through reduction of layers within the Governmental
structure so that decision making and delivery is expedited. In the
process, a number of superfluous levels have been removed. This
simplification is also reflected in the entire scheme of pay scales
being substituted by a system of running pay bands, where the
existing 35 pay scales have been replaced by 4 running pay bands
(excluding -1S) containing 20 grades. Additionally, the posts of
Cabinet Secretary/equivalent and Secretary to Government of
India/equivalent have been placed in distinct pay scales. A system

that primarily lays emphasis on delivery and end results and which
continuously rewards performance has been put in place by
incorporating features like Performance Related Incentive Scheme
(PRIS) and variable increments in the basic scheme of pay scales. By
incorporating systemic changes in the existing procedure of
appointments, efforts have been made to ensure a young and
dynamic bureaucracy, with a result oriented approach, where the
best persons available are selected for holding specific posts. While
proposing these changes, the Commission has also kept in view the
capacity of the Government to pay and the principle that every
rupee spent on allowances, facilities and salaries of Government
employees has to translate into a specific measure for public good.
The Commission, at the very outset, would like to underline the fact
that this Report is a holistic document and has to be treated as an
organic whole since all the major recommendations contained
therein are inextricably inter-twined. Accordingly, any modification
in the scheme of recommendations can severely affect the outcome
this Report sets out to achieve. The Government, therefore, would
be well advised to consider implementing all the major
recommendations contained in the Report as a package.

The Terms of Reference permitted the Commission to devise
its own procedure. To elicit the views of various stakeholders, the
Commission issued a public notice inviting all interested persons,
including members of the public, peoples' representatives, consumer
associations, staff associations, State/UT Governments, ministries/
departments to send their views on the subject by 31st December
2006. Consequent to an addition in the terms of reference,
Unions/Associations of officers and employees of the Supreme
Court of India were requested to submit their memoranda to the
Commission before 31st August 2007. A questionnaire was also
prepared to facilitate responses from Individuals/Groups on the
items of specific interest to the Commission with facility for online
response. The analysis of responses to the questionnaire is given at
the end of the Volume carrying Annex to the Report. To elicit the
views of various States on the financial impact that the likely
recommendations of this Commission would have on them, a
questionnaire in this regard was also sent to the State Governments.
Since the Terms of Reference of the Commission included
Regulatory Bodies, information on regulatory bodies set up under
Acts of Parliament was also sought from the concerned
Ministries/Departments. Following studies on specific subjects of
importance were carried out by expert bodies on behalf of the
Commission:- Study on Feasibility of Performance Related Incentive (PRI)
- Study for Estimating the Compensation Package for Government
Employees and the Cost to the Government
- Study on Terminal Benefits of the Central Government Employees

(Full text of the Reports of these Studies is at the website of Sixth

From January 16, 2007, the Commission initiated meetings with
various stakeholders to personally hear their views and demands on
related issues. Meetings were held in various parts of the country to
facilitate stakeholders staying in distant areas to present their views
personally before the Commission and also to ensure larger
representation. During these meetings, the Commission also got the
benefit of hearing the views of Secretaries to Government of India,
Heads of Department and other eminent persons. The Commission
held these meetings in Mumbai, New Delhi, Kolkata, Port Blair,
Guwahati, Chennai, Puducherry, Ahmedabad, Gandhinagar,
Bangalore, Srinagar, Kargil, Leh and Hyderabad. During these
hearings, a considerable number of documents were handed over to
the Commission. The list of Unions/Federations/Associations/
eminent persons heard by the Commission is at Annex 1.1.1.

1.1.10 The Commission visited several establishments in different

parts of the country to get a first hand impression about the
functioning and the conditions of service prevailing there. During
these visits, the Commission also interacted with a large number of
field level functionaries.

Working of the

1.1.11 The Sixth Central Pay Commission was given a period of 18

months to submit the Report. The Commission initiated its work
immediately after the date of its Notification on 5th October, 2006.
The Commission adopted a totally delayered approach where no
hierarchical levels were allowed to exist and all functionaries could
freely discuss the concerned issues with any one in the Commission
irrespective of their hierarchy. This approach facilitated expeditious
decision making and the Commission was able to finish its task well
within the stipulated time-frame with a very small complement of
staff. To keep the staff requirement at minimum, only multi-skilled
functionaries were taken and no Group D staff employed. The
Members and the officials of the Commission were not provided
individual secretarial assistance or peons. Although 48 posts were
sanctioned, the Commission filled only 17 posts. This has to be
viewed vis--vis the strength of earlier Pay Commissions where the
Fifth CPC had a total sanctioned strength of 141 posts (out of which
135 posts were filled) and the Fourth CPC had 209 posts. The
Commission was able to achieve its target with a very small staff
complement because the work processes in the Commission were reoriented to have a result-oriented approach with emphasis on
output rather than processes. Due to these work practices, the
Commission was able to complete its work utilizing less than 60% of
the allocated budget. In the Commissions opinion, a similar policy
needs to be adopted in all Government offices, which would
increase efficiency and improve the end user satisfaction.

Chapter 1.2

Philosophy & the guiding principles


The Government constituted the Sixth CPC at a time of
fast and accelerating economic development, emerging trade
and commercial practices, increasing globalization of trade and
industry with greater emphasis on increasing investment flows
and transfer of technology. Indian economy is rapidly getting
integrated with the rest of the world. In the economic and
financial sectors, the earlier era of protectionism where the
Government largely played the role of a monopolistic supplier
or of a restrictor or controller, has changed. The principal role of
the Government presently is perceived to be that of a facilitator
and regulator in the various economic activities. An imperative
and urgent need exists to harmonize the functioning of the
Central Government Organisations with the demands of the
emerging global economic scenario. In the social/
developmental sectors, especially in the fields of food security,
elementary education, primary health care, and rural/urban
development, the functioning of Government Organizations has
to be improved to make them more professional, cost-efficient,
citizen-friendly and delivery oriented. The Commission is the
first Central Pay Commission to be constituted in this century of
rapid technological advances and after coming into force of the
Right To Information (RTI) and Fiscal Responsibility and Budget
Management (FRBM) Acts. The Government machinery has to
learn to adapt to these changes and to leverage knowledge and
technology for better performance under stricter fiscal discipline
and better delivery mechanisms. The Terms of Reference of the
Commission suitably reflect this changed imperative.

Related Incentive
Scheme (PRIS)

The Commission has recommended several innovative
features to ensure better delivery systems in the Government
with emphasis on end user satisfaction which is the primary
criterion for judging the efficiency of an organization.
Introduction of Performance Related Incentive Scheme (PRIS) is
a step in this direction. This is not a new concept. Many of the
earlier Central Pay Commissions as well as various expert
committees constituted in the past have recommended

performance related incentives in one form or the other. In this

Report, however, the Commission has tried to devise a workable
and practical model by which the concept can be implemented
in the Government. The PRIS recommended by this Commission
envisages a pecuniary component, over and above the salary,
for higher performance that would be judged by improved
delivery to the end user by an external independent agency.
This scheme of PRIS has been recommended to be implemented
in all ministries/departments/organisations of the Central
Government in a phased manner. Performance Related
Incentive Scheme (PRIS) should also work as a substitute for
bonus (whether linked to productivity or ad-hoc), honorarium
and over time allowance.
Fitment benefit

The efforts of the Commission have been to devise a
suitable pay package which will not only provide enough
incentive to retain the brightest officers but also attract the best
to join it in future. The quantum of fitment has been decided,
accordingly. At the time of Fifth Central Pay Commission,
fitment of 20% of the pre-revised basic pay was recommended.
This was subsequently raised by the Government to 40%. The
Commission is recommending a new structure of running pay
bands and grade pay. In the structure, grade pay has been
normally taken at 40% of the maximum of the pre-revised pay
scale. Grade pay is, therefore, in the nature of fitment benefit.
The pay in the running pay band, as on 1/1/2006, has been
computed by adding the basic pay and dearness allowance at
the rate of 74% that would have been payable on the existing
Fifth CPC pay scales w.e.f. 1/1/2006 had merger of dearness
allowance equal to 50% of the basic pay not been allowed from

Minimum salary

For fixing minimum salary, the Commission has mainly
been guided by various factors like ensuring fair wages keeping
in view the capacity of the Government to pay, the inflationary
impact of such increase on the economy in general and on the
State Governments, various autonomous bodies and other
organizations which follow the Central Government pattern of
pay, and the fact that the minimum salary in Government can
only be available at the entry level when an employee is single
or married with a nuclear family. The consumption units for
computing the minimum salary have been taken as three,
which, in our view, reflects the factual reality.
A fair
comparison based on principles of equity and social justice, also
makes it imperative to take into account the economic
conditions of large sections of the community that are less
privileged than Government employees and several of whom
live below the poverty line.

Salaries in higher

The issue of fixing salaries in higher grades is more
complex. Most of the employees, in the memoranda submitted
to the Commission, and during the oral evidence, desired a
linkage with the salaries in the public sector enterprises as well
as the private sector on the ground that a broad parity needs to
be ensured between the salaries in Central Government and in
the public sector enterprises. A view has also been expressed
that there is excessive job security enshrined in Article 311 of the
Constitution and that cumbersome rules act as a hindrance to
easy exit of Government employees. The Commission has given
deep thought to all these arguments. It is undeniable that
Government jobs provide unparalleled job security, pension
benefits, work-life balance and status. The capacity of the
Government to pay is limited. Further, the Government also
provides a vast array of non-monetary benefits that can and
should be monetized in order to correctly assess the actual
Quantification of these benefits has other advantages as well.
The aspirants for each category of Government job would know
beforehand precisely what total package to expect and, could
decide for themselves whether the Government job is
sufficiently attractive vis--vis jobs in other sectors. This is all
the more necessary because the salary packages offered in the
private sector are on the basis of the cost to the company. In the
Government, existence of multiplicity of allowances, coupled
with a certain degree of uncertainty regarding their
admissibility, considerably discounts the attractiveness of
Government job in strict monetary terms. Secondly, this
quantification will enable Government, Parliament and the
public to have a clear, comprehensive and accurate picture of
the total expenditure being incurred on Government employees,
both civil and military, since non-monetary perquisites scattered
over many budgetary heads, mask the true picture of the
expenditure incurred on the employees. The Commission has
taken various steps to assess the monetary value of such
benefits. A study was also commissioned in this regard. An
estimate of the total compensation package available to
employees in different sectors has, for the first time, been
attempted/computed upfront so that employees get a better
idea of the benefits they receive and what these benefits cost the
Government. It would also help in crystallizing, in monetary
terms, the cost to society of delivery of the service that the
employee is providing.

appointments for
fixed tenures

The Commission is recommending introduction of
contractual appointments for selected posts, particularly those
requiring high professional skills. Under this, suitable persons
from outside can be inducted in the Government. The existing
employees, at their option, can also negotiate a consolidated
amount for a specific tenure in a particular post provided they
leave the service. Such employees will not be entitled to any
other benefit. After the expiry of the tenure, the concerned
employee may renegotiate the contract or leave. This will allow
salaries that are broadly comparable to the private sector with
similar terms of engagement to be paid in the Government. The
concerned department/organization would not be given any
extra budget on this account and should ensure commensurate
savings elsewhere to absorb the extra expenditure incurred. The
Commission is of the view that this will not only enable the
opting employees to get remuneration comparable with the
private sector but will also improve the work culture in the
Government because continued employment of such employees
will depend solely on their performance just like in the private
sector. Another benefit that is expected to accrue will be infusion
of fresh talent while simultaneously enabling the Government
employees to leave the Government without following
cumbersome procedure that applies in case of permanent
Government employees. This will enable the Government to pay
a higher and need-driven remuneration depending on the
particular expertise of the concerned employee which will also
stall the efflux of such employees to the private sector at a time
when Government needs their experience. The scheme will be
very useful for various technical and scientific categories that
can opt for higher remuneration under a contractual
appointment on tenure basis in the Government.

Running pay bands

A major departure from the earlier Pay Commissions
has been made in respect of pay scales. For the first time, the
Commission is recommending running pay bands for civilian
employees as well as for the Defence Forces. The Fourth Central
Pay Commission had recommended running pay bands for
Defence Forces that were implemented. The Fifth CPC,
however, recommended specific pay scales for civilians as well
as Defence Forces personnel. A conscious departure has been
made in recommending running pay bands because of the
inherent advantages of such pay scales.
1.2.8 Since the individual pay scales have a limited span, it often
leads to stagnation. To ease stagnation, promotional avenues
have to be created even though no functional justification for
higher posts may exist. Creation of additional posts in higher

grades through cadre reviews, etc. does not always achieve the
desired results in terms of improved career progression.
Movement from one pay scale to another frequently leads to
problems in pay fixation like a senior drawing lower salary vis-vis a junior. Running pay bands will address all these
problems and also remove many of the pay scale related
1.2.9 Distinct running pay bands have been recommended for
Government employees belonging to groups A, B and C.
Employees in group D are to be retrained and upgraded to the
lowest grade in pay band for group C. Within Group A, an
additional separate running pay band has been prescribed for
posts in the scale of Rs.18400-22400 and in higher administrative
grade. This is because a common pool for all such posts that are
not already encadred in any of the organized AIS/Group A
services including posts under the Central Staffing Scheme has
been recommended to which suitable officers of all services
would be eligible for selection, based on their performance and
merit. The common pool will ensure availability of the best
talent for crucial posts in the highest grades. The interests of the
officers who are not selected will not be harmed as they will still
be eligible for promotions to the encadred posts within their
individual services. Distinct scales have been recommended for
the posts of Secretary and Cabinet Secretary, because these posts
are occupied by heads of specific departments/ministries and
the head of the bureaucracy respectively. As such, a distinction
needs to be maintained for the pay scales attached to these
Date of Effect

1.2.10 The revised pay structure has been devised to take effect
from 1.1.2006. This will meet the demand of a majority of the
employees and their associations. It is also in consonance with
the observation made by the Fifth CPC that the next Pay
Commissions pay scales should be made effective from such
date. Recommendations relating to allowances and other issues
should, however, take effect prospectively from the date these
recommendations are accepted by the Government as was done
while implementing the recommendations of the Fifth CPC.

Career progression

1.2.11 The pay structure has been so devised as to provide a

decent entry grade and smooth career progression without any
stagnation. The existing Assured Career Progression Scheme
which provides two time-bound promotions in a span of 24
years has also been retained in a modified manner. Running
pay bands and Modified Assured Career Progression Scheme
will ensure smooth progression for 24 years. Even after 24
years, running pay bands will ensure that no one stagnates.


Changes in pension
rules to facilitate
early exit/

1.2.12 The Commission has also recommended modifications

in the CCS (Pension) Rules, 1972 that will enable payment of
pension at the rate of 50% of the average emoluments/ last pay
drawn without any reference to the qualifying service of 33
years for full pension. This will enable Government employees
to leave the service at a relatively young age, in case they feel
that they have more opportunities outside, or to opt for
contractual appointment for specified posts within the
Government. Simultaneously, the Government will be able to
tap the best available expertise from within or outside the
Government for senior positions. Shift from career based to
post based selection in the higher echelons of Government has
been recommended in order to get the best domain based
expertise. For Groups B and C, a fast track promotion
mechanism has been recommended by means of Limited
Departmental Competitive Examination that is proposed to be
introduced in most of the levels in Groups B and C.

Cadre Reviews

1.2.13 The Commission received many memoranda from

various associations, organizations and individuals seeking
review of specific cadres. The Commission is aware that the last
Pay Commission had reorganized and rationalized many
individual cadres. These reviews, however, frequently disturbed
the established relativities. Further, most of these reviews have
been sought on the ground of alleviating the existing stagnation.
The Commission is of the view that cadre review cannot be used
as a tool for easing stagnation.
The Commission has
incorporated other provisions in the Report that will address the
problem of stagnation and delink promotions from career
progression. Accordingly, as a matter of policy, this
Commission has refrained from undertaking specific cadre
reviews that in any case need to be carried out within an
institutional framework. An established procedure for
conducting cadre reviews exists in the Government. This would
now need to be reviewed in the light of the recommendations
made in this Report. It, however, has to be emphasized that,
apart from non-functional upgradation of some posts on
personal basis in consonance with certain recommendations
made in the Report, creation of additional posts in Senior
Administrative Grade/equivalent/ higher grades in future has
to be strictly on functional considerations and such posts
should invariably be created outside the cadre to be filled by
method of open selection separately being recommended in
the Report.

Allowances and

1.2.14 The demands in this regard invariably sought increase

in the quantum of various allowances available to the


employees. The Commission has done a rationalization of the

allowances. Some allowances like CCA have been proposed to
be abolished and compensated elsewhere. The Commission has
also attempted quantification of various benefits including
allowances so as to compute the cost per employee to the
Government and also to assess if these benefits could be made
available to the employees in a more beneficial manner. The
recommendations have been made accordingly.

1.2.15 Recommendations have been made to simplify the

procedure for computation of pension. As mentioned earlier,
the Commission has recommended delinking the payment of
full pension on completing 33 years of qualifying service.
Higher rates of pension have been recommended for retirees on
attaining the age of 80, 85, 90, 95 and 100 years. A revised
commutation factor for commuting pension has also been
suggested taking into account the prevailing mortality rates,
interest rates and fact that the commuted portion is restorable
after 15 years.

Women employees

1.2.16 The Commission is conscious of the need to provide

better facilities for women employees. Benefits like staggered
working hours, special leave for child care, enhanced maternity
leave of 180 days, better accommodation facilities in form of
working womens hostels have been recommended specifically
for women employees.

Persons with

1.2.17 The Commission has taken note of the problems faced

by Government employees with disabilities and recommended
various measures to alleviate the same. Enhanced number of
casual leave, special aids and appliances for facilitating office
work, higher interest subsidy for automobile loans, liberal flexi
hours, extra allowance for disabled women employees to take
care of young child till the time the child attains the age of two
years, higher rate of transport allowance, better prosthetic aids
and a proper grievance redressal machinery has been
recommended for these employees.

Upgradation of
certain categories

1.2.18 The Commission has recommended upgradation of

certain specific categories like Nurses, Teachers, Constabulary
and Postmen keeping in view the important functions being
discharged by these categories. Parity between field offices and
secretariat has been proposed as, in Commissions view, equal
emphasis has to be given to the field offices in order to ensure
better delivery.


1.2.19 Most of the memoranda sent to the Commission by

Government organisations, employees or their associations


highlighted various anomalies with reference to the pay scales,

allowances or status. These anomalies in majority of cases were
caused by upgradations of specific individual posts or grant of
certain allowance by the earlier Central Pay Commissions or the
Government. In some cases the upgradations had to be
extended to comply with specific directions of various Courts.
The Commission has taken note of these anomalies.
Anomalies in pay

1.2.20 Insofar as anomalies relating to the pay scales are

concerned, a large number of these anomalies would be
automatically settled by introduction of the proposed scheme of
running pay bands.
Where considered necessary, the
Commission has also recommended upgradations of individual
posts in order to remove these anomalies. The Commission has,
however, taken care to minimize the number of
recommendations for such upgradations and the same have
been restricted to the cases that were covered by any of the
following conditions: a)

Where the promotion post had come to lie in a lower

scale vis--vis any of the feeder posts.


Where the promotion and feeder posts existed in an

identical scale and the level of duties /responsibilities
and qualifications attached to these posts were
manifestly distinct precluding their merger.


Where, (i) a distinct and established relativity had

existed between different posts; (ii) the posts were
otherwise comparable on the basis of the functions,
nature of the job, qualifications prescribed, level of
responsibility attached; and (iii) such relativity was
disturbed at the time of or after the implementation of
the recommendations of the last Central Pay


Where identical or analogous posts discharging similar

functions had been placed in two or more distinct pay


Where the functions, nature of the job, qualifications

prescribed and level of responsibility attached to the
post justified a higher pay scale without causing any
distortion or imbalance in any of the established

All the individual upgradations recommended by the

Commission shall, in no case, take effect before 1.1.2006. This
is because the Commission has no intention of rectifying these


anomalies right from the time of their inception and is of the

view that interest of justice will be served if these anomalies
are rectified for the present and the future.
Anomalies in

1.2.21 The Commission received demands from almost all the

central paramilitary and security organizations, scientific
institutions and other services seeking grant of special
allowance keeping in view the onerous nature of duties
performed by them. It was the common argument of all that
their respective organizations were performing a special job and
deserved to be granted a special allowance. The Commission is
of the view that grant of special allowance for performing the
assigned duties in respect of any organisation is not justified
because the same is taken care of by the salary attached to the
posts. The Government has, in the past, extended special
allowances in various forms to certain posts in different
organisations which, in their opinion, deserved to be paid such
an allowance. The Commission is maintaining status quo in
respect of these allowances extended by the Government in the
past. Insofar as further extension of any allowance on this
account is concerned, the principle which should be followed is
that more onerous duties should result in a relatively higher
pay scale being attached to the post rather than any special
allowance. A mechanism exists for evaluating the duties
attached to different posts in an organization which should be
used to assess the appropriateness of the existing pay scale
(proposed to be substituted by grade pay and pay band) rather
than granting a special allowance for performing the normal
duties. Performance of duties beyond the normal call should,
in the revised scheme of things, result in a higher performance
related incentive. The specific problems faced by defence forces
personnel (viz. army, navy and air force) on account of rigours
of military life are, however, proposed to be compensated by an
additional element of pay termed Military Service Pay (MSP).
1.2.22 The Commission has recommended substantial increase
in the rates of many allowances like Transport allowance,
TA/DA, Education Allowance, etc. to make them realistic.
Apart from this, rationalization of allowances like HRA has also
been proposed. The fixed allowances have been made inflation


1.2.23 The Administrative Reforms Commission is presently

recommendations. The Fifth CPC had also made numerous
recommendations in this regard. Thereafter, the Government
had also constituted the Expenditure Reforms Commission.
While the issue of increasing productivity, efficiency and a


result oriented approach with greater emphasis on end user

satisfaction rather than on mere procedures has been addressed
in the Report, the Commission has refrained from making
comprehensive recommendations on the issue of organizational
reforms. Recommendations given by expert bodies in the past
like Expenditure Reforms Commission have been reiterated,
wherever the Commission is of the view that the same are
essential for better delivery and removing the flab from the
Government. Some observations regarding corporatization of
certain service ministries/departments have also been made.
Defence Forces

1.2.24 The Commission has recommended parity between

various posts in the Defence Forces and civilian employees.
Establishing such parity was necessary for another major
recommendation contained in the Report concerning lateral
movement of the Defence Forces personnel to Central Para
Military Forces (CPMFs), other Central Police Organizations and
defence civilian organisations. Such lateral movement would
not only result in large savings for the Government but will also
help in providing continuous employment to the various grades
of Defence Forces personnel and make available a trained and
disciplined force for the use of the nation. This will also have
numerous other benefits, which have been discussed in detail in
Chapter 2.4 of the Report. The pay scales for the Defence Forces
have been devised accordingly. As mentioned earlier, the
Commission has also recommended a separate element of pay
called Military Service Pay for the Defence Forces keeping in
view the difficulties specific to the military life. The Military
Service Pay is to be treated as pay for all purposes (excluding
increments) but will not be available once Defence Forces
personnel shift to the CPMFs, etc. The concept has been
discussed in detail in Chapter 2.3 relating to pay scales of
Defence Forces personnel.

Implementation of

1.2.25 The Report has been kept concise as the Commission is

of the view that lengthy and elaborate documents tend to get
ignored as well as are liable to be quoted out of context. Most of
the demands made before the Commission have been addressed
by recommending systemic changes. Such demands have not
been individually referred to in the Report. The number of
recommendations made by the Commission is also limited. All
the recommendations are inter-connected and need to be treated
as an organic whole. Partial implementation of these
recommendations will destroy the underlying spirit, break the
common thread and bring in several anomalies and
inconsistencies. The Report would, therefore, need to be
treated in a holistic manner and the recommendations
considered as a package.


Chapter 1.3

The General Economic Situation &

Financial Resources of the Central
and State Governments
Terms of reference

The Terms of Reference of the Commission required
that the recommendations had to be made taking into account
various factors like the economic conditions in the country, the
need to observe fiscal prudence in the management of the
economy, the resources of the Central Government and the
demands thereon on account of economic and social
development, defence, national security and the global
economic scenario as well as the impact upon the finances of the
States, if the recommendations are adopted by them.

Trends in Economic

The recent years between the last Pay Commission and
now have witnessed a ratcheting up of growth. The overall
macroeconomic situation has improved greatly with tangible
progress towards fiscal consolidation and a strong balance of
payments position. Gross Domestic Product (GDP) at factor cost
at 1999-2000 constant prices has increased from Rs.18.7 lakh
crore in 2000-01 to Rs.28.6 lakh crore in 2006-07, a 52.9 percent
increase in seven years. The annual growth rate of GDP has also
shown a general increase, from that of 5.8 percent per annum in
2001-02 to a level of 9.6 percent in 2006-07.
The Index of Industrial Production has increased
approximately 2.7 times, from a level of 91.6 in 1990-91 to 247.1
in 2006-07 while the Index of Agricultural Production with base
1981-82, which stood at 166 in 2000-01, has increased modestly
to 197.1 in 2006-07. There has been a steady increase in the
annual growth rate of industrial production. This impressive
growth in the industrial sector is propelled by the robust growth
in manufacturing, which occupies the major share of the
industrial production. The fastest growing sector has been
Services. Between 2002-03 and 2006-07, 68.6 percent of the
overall average growth in GDP has been attributed to growth in
services. Trade, hotels, transport and communication became
the leading sector by growing at double digits since 2003-04.
Agriculture has shown wide fluctuations in its growth. In the


first five years since 2001-02, its annual average growth has
been of the order of 3 percent. It increased to 6 percent in 200506 and then dipped to 3.8 percent in 2006-07. The low growth in
agriculture has wide ramifications in terms of price instability
due to snowballing effect of supply side constraints in essential
commodities, and in terms of the inclusiveness of the growth
process. Industrial growth, however, has revived since 2001-02.
The real growth rates in industry that stood at 2.7 percent in
2001-02 accelerated to 11 percent in 2006-07.
Gross domestic
capital formation
and savings

The gross domestic capital formation has increased from
a level of 26.3 percent of GDP at current market prices in 1990-91
to 35.9 percent in 2006-07. This buoyancy in the rate of
investment in the economy in recent years is reflective of the
high degree of business optimism. Gross domestic savings as a
proportion of GDP at current market prices has been increasing
since 2000-01 with savings rate rising from 23.5 percent in 200001 to 34.8 percent in 2006-07, mainly attributable to savings in
the public sector and private corporate sector.

External sector

Exports have increased by 182 percent from a level of
US $ 45.5 billion in 2001 to US$ 128.1 billion in 2006-07. The
trade deficit increased from approx. US$ 12 billion in 2000-01 to
about US$ 63 billion in 2006-07. While external debt has been
increasing in absolute terms, it has decreased as a proportion of
the Gross Domestic Product (GDP) from a level of 20.4 percent
in end March 2003 to 17.9 percent in end March 2007.

Trends in Prices

1.3.6 The General Wholesale price index (WPI) (52 weeks

average) increased 1.6 times between 1995-96 to 2005-06 while
the price index for manufactures increased by 1.4 times and that
of agriculture 1.6 times. Between 1996-97 and 2000-01, the
general inflation averaged 5.1 percent. Acceleration in inflation
post 2006 was caused by acceleration in inflation in primary
commodities and continued high escalation in price of the
commodities in fuel group due to hardening of global prices.
The Consumer Price Index (CPI) with Base 1982,
increased from a level of 342 in 1996-97 to 579 in 2006-07.


Consumer price Index-CPI(IW)

General Base 1982=100


















CPI(IW) General Base 1982=100

The primary commodity specific nature of inflation
translated into a higher level of inflation when measured in
terms of the CPI as compared to WPI. This was mainly due to
three reasons:-

Fiscal Performance
of the Centre


Higher weightage of food group in the consumption



Higher rate of inflation in the various items included in

food group, and


Differences in composition of the basket for compilation

of the two indices.

1.3.9 The revenue deficit of the Central Government stood at 2.5

percent of GDP in 1995-96. This increased to 3.8 percent of GDP
in 1998-99. The increase was largely attributable to increased
expenditure on salaries and pensions consequent upon
implementation of the Fifth Central Pay Commission
recommendations. The revenue deficit peaked at 4.4 percent in
2001-02. Fiscal deficit also increased as a percentage of GDP
from 4.2 percent in 1995-96 to 6.2 percent in 2001-02.
1.3.10 Revenue deficit as percentage of fiscal deficit increased
sharply from 59 percent in 1995-96 to 80 percent in 2003-04
implying that borrowings were being increasingly used to fund
current expenditure and only 20 percent of the borrowings were
directed towards asset creation. It reflected the un-sustainability
of the fiscal situation and the increasing risk of falling into a
debt trap. This fiscal imbalance was identified as the root cause
of the twin problems of inflation and the difficult balance of
payments position. The chart below shows the trends in


revenue deficit and fiscal deficit of Central Government.


Percentof GDP

1995-96 1996-97



99-2000 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07

Revenue deficit

Fiscal Reforms and

Management Act

Fiscal deficit

1.3.11 In the backdrop of the tight fiscal situation, the FRBMA

was enacted on August 26th, 2003 and the Act and Rules were
notified to come into effect from 5th July 2004. The FRBMA
provided a defined mandate for medium term fiscal
1.3.12 The Rules under FRBMA stipulate that the revenue
deficit be reduced by an amount equivalent to half percent or
more of the estimated GDP at the end of each financial year and
be eliminated by 31st March 2009. Fiscal deficit is to be reduced
by an amount equivalent to 0.3 percent or more of the estimated
GDP at the end of each financial year and reduced to no more
than three percent of the estimated GDP by the financial year
ending on 31st March 2009.
1.3.13 The continuous and essentially incremental process of
fiscal consolidation under FRBMA has been satisfactory. Post
FRBMA, revenue deficit as percent of GDP has declined from 3.6
percent in 2003-04 to 1.9 percent in 2006-07(P). Fiscal deficit as a
percent of GDP declined from 4.5 percent in 2003-04 to
approximately 3.4 percent in 2006-07(P). Revenue deficit as
percent of fiscal deficit declined from 80 percent in 2003-04 to 56
percent in 2006-07(P).
1.3.14 The FRBMA stipulates that public expenditure be
reoriented for the creation of productive assets. It highlights the
significance of keeping the revenue expenditure under control
so as to eliminate revenue deficit by 2008-09. This essentially
would necessitate that revenue expenditures are kept within the


contours of revenue receipts. As revenue expenditure is

composed of pay and allowances, interest payments, grants to
States and Union Territories, subsidies, etc., expenditures
thereon would need to be synchronized with revenue
1.3.15 The non-debt receipts of the Central Government
comprise tax revenue receipts, non-tax revenue receipts and non
-debt creating capital receipts. The share of tax revenues in the
total revenue receipt has been predominant.
2006-07 Actuals(P)



Tax revenues net of states share

Non -tax revenues

Non- debt capital receipts

1.3.16 The tax revenue receipts of the Central Government net

of share of States stood at Rs.95,672 crore in 1996-97. This
increased to Rs.3,51,494 crore in 2006-07.
Total Revenue Receipts



Rs. crore

















Total Revenue Receipts





1.3.17 Non-tax revenue receipts mainly comprising interest

receipts, dividends and profits, receipts from economic, social
and fiscal services increased by 152 percent between 1996-97
and 2006-07.
Non Tax Revenues

Rs crore




99-2000 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06


Non Tax Revenues

1.3.18 The expenditure of the Central Government has

increased by 190 percent from 1996-97 to 2006-07. Not only has
the total expenditure increased, the predominance of revenue
expenditure has also increased implying that expenditure on
capital formation is low and declining. The following table
depicts the composition of expenditure of Central Government
since 1996-97 :Composition of Expenditure














Revenue Expenditure

Trends in Pay and







Capital Expenditure

1.3.19 The expenditure of the Central Government (excluding

the Defence Forces), on pay and allowances, stood at Rs.20,396
crore in 1996-97 on the Fourth CPC scales. The Fifth CPC pay
scales were implemented in September 1997, albeit


retrospectively, from 1/1/1996. The impact of revision of the

pay scales and allowances by Fifth CPC resulted in the
expenditure on this account increasing by 67% between 1996-97
and 1999-2000. The expenditure on pay & allowances in 2005-06
is estimated to be Rs.39,811 crore resulting in an increase of 17
percent over 1999-2000. The trend in this expenditure on pay
and allowances is as seen in the following chart:Pay & Allowances excl. Defence Forces



Rs crore

















Pay & Allowances excl. Defence Forces

1.3.20 The major jump noticeable in the two years following

1996-97 is attributed to payment of arrears consequent upon
recommendations of Fifth Central Pay Commission.
1.3.21 The dip in pay and allowances in 2001-02 is attributable
to the exclusion of the employees of Telecommunications.
Increase in 2004-05 over 2003-04 is attributable to the impact of
merger of dearness allowance.
1.3.22 Expenditure on pay and allowances and pensions
impact the revenue expenditure of the Government. It
constituted 22 percent of the revenue expenditure in 1996-97. It
rose to 27 percent as a result, inter alia, of the impact of the Fifth
Central Pay Commission. It has thereafter been hovering around
21 percent. Average for the years 2004-05 to 2006-07 shows that
pay, allowances and pensions including those for Railways
comprise 24 percent of revenue receipts. Impact of the
recommendations of the Fifth Pay Commission resulted in the
share of pay, allowances and pensions in revenue receipts
increasing from 28 percent in 1996-97 to 38 percent in 1998-99.


1.3.23 The expenditure on pensions was Rs.7,956 crore in 199697 before implementation of the recommendations of the Fifth
CPC. It increased to Rs.28,928 crore in 2005-06 and is placed at
Rs. 31,350 crore in 2006-07 resulting in an increase of 294 percent
within a span of ten years from 1996-97 to 2006-07. The impact
of the Fifth Central Pay Commission resulted in an increased
outflow of 39 percent in 1997-98 over the previous year which
was compounded by a further increase of 32 percent in 1998-99.
Thereafter, the growth tapered off. However, in 2003-04 the
pension outflow saw renewed growth consequent upon merger
of Dearness Allowance as evidenced from the following chart:Pension (excluding Railways)



Rs crore


















1.3.24 Pension outflow

constitutes 35% of the
expenditure on account of salaries, allowances and pension as
evident in the chart below:Share of Pensions in Total




















Total Pay & Allowances




Resources of the

1.3.25 As per its Terms of Reference, the Commission, while

making its recommendations, is required to assess the resources
of the Centre bearing in mind the demands on its resources for
the development of the economy, defence and national security.
Projections made by the Ministry of Finance for the Eleventh
Plan period and the assessment of the Working Group on
Centres Resources for the Eleventh Five Year Plan in regard to
various items of receipts and expenditures, except expenditure
on pay and allowances and pensions, forecast the following:i)

GDP growth at current prices of 13 percent from 2007-08 to

2010-11 and 13.5 percent in 2011-12.


Decline in WPI inflation from 5 percent in 2007-08 to 4

percent in 2011-12.

iii) Doubling of tax revenues from Rs. 4,66,507 crore (with

Direct tax revenues constituting Rs. 2,29,272 crore and
Indirect taxes constituting Rs. 2,37,235 crore) in 2006-07 to
Rs.10,56,149 crore in 2011-2012 comprising Rs.6,35,053 crore
as direct taxes and Rs. 4,21,096 crore as indirect taxes. As a
proportion of GDP, the increase in total tax revenues is
from 11.4 percent in 2006-07 to 13.9 percent in 2011-12, an
increase of 2.5 percentage points.
iv) Increase in non -tax revenues from Rs.77,360 crore in 200607 to Rs.103,276 crore in 2011-12
Projections on
expenditure, pay,
allowances and

1.3.26 The Commission is of the view that while

recommending revision in pay and allowances, the question of
adequacy of remuneration needs to be considered along with
availability of fiscal space. The annual gross impact of the
recommendations of this Commission is estimated at Rs.12,561
crore, including Rs.3,319 crore on account of Railways. This does
not take into account the projected savings.
Since the
recommendations relating to pay structure i.e. pay bands as well
as pensions are proposed to be implemented retrospectively
from 1.1.2006, payment of arrears will be an additional one time
expenditure of Rs.18,060 crore, including Rs.5,416 crore on
account of Railways. This additional expenditure can be spread
over two financial years in case the Government decides to split
the arrears in two financial years.

Impact on Central

1.3.27 The Commission has analyzed the impact of its

recommendations on the Central Governments budget in the
backdrop of the future profile projected by the Central
Government on revenue receipts during the Eleventh Plan
period. For assessing the Governments capacity to pay, the


average ratio of expenditure on pay and allowance and pensions

of civilian employees (excluding Railways) and Defence Forces
personnel, to revenue receipts for the years 2005-06 and 2006-07
has been calculated and this ratio applied to the future years for
determining notionally the manner in which pay and
allowances and pensions are likely to grow if this ratio is
maintained. These results have been compared with the
projections based on the Commissions recommendations on
pay and allowances and pensions without taking into account
the savings.
The comparison shows that after taking into
account the additional annual financial implications, the ratio
during the Eleventh Five Year Plan period is well below the
average ratio for 2005-06 and 2006-07. Even after including the
payment of arrears in the years 2008-09 and 2009-10, this
position does not change. As such, in view of the revenue
receipts expected in the future, the Central Government
should be in a position to meet the additional expenditure
consequent to the Commissions recommendations. The
future projections also need to be viewed in the light of the
projected savings expected to be generated by various
recommendations like lateral shift of Defence Forces personnel
to Central Police Organisations etc.; changes in mode of
payment of commutation along with a revised commutation
table; limiting the role of Government on various loans to
Government employees to granting interest subsidy, etc. The
savings on this account will, over the next decade, substantially
off-set the additional expenditure to be incurred at the time of
implementation of the Report.
Fiscal position of
State Governments

1.3.28 The Commission has been informed by the Central

Government that the Fiscal deficit of all the States in the
aggregate declined from 4.09 percent of GDP in FY 2002 to 2.95
percent in FY 2006. The performance, in aggregate, of States has
been quite spectacular, to the extent that many states have
already achieved the fiscal correction path suggested by the
Twelfth Finance Commission for the five year period. Twenty
six out of the twenty eight States have enacted the FRBM Act
(Fiscal Reform and Budget Management Act) as on July 2007,
and have earned the debt waiver for having remained on the
fiscal correction path. By 2008-09, the revenue deficit is targeted
to be reduced to zero for availing the debt waiver benefits. The
fiscal correction has been aided by enhanced tax revenues
consequent upon introduction of VAT (Value Added Tax) which
has led to reduction in structural deficit without compression of
expenditures. However, Bihar and West Bengal have reduced
deficits through forced expenditure cuts.


Projections by the
Working group on
States Resources
for the Eleventh
Five Year Plan

1.3.29 The Working Group on States Resources for Eleventh

Five Year Plan has also observed that there has been an overall
improvement in State finances since 2002-03. Factors which
have contributed to such a turn around are, inter-alia, overall
improvement in the rate of growth of the economy leading to
buoyancy in the tax revenues of the Centre and States,
introduction of VAT and restructuring of the State taxes in many
States. The fall in the interest rates of States borrowings, the
debt swap scheme and the consolidation and restructuring of
States debts have reinforced the States efforts in mobilizing
resources. In terms of the Working Groups estimates, the
aggregate resources for 28 States is estimated to increase from
Rs.1,99,384 crore in 2007-08 to Rs.3,65,922 crore in 2011-12, at
current prices.

Impact on State

1.3.30 Many States have achieved the FRBMA mandated target

of eliminating revenue deficit ahead of the scheduled 2008-09.
According to the Reserve Bank of Indias latest Report on State
Finances, nineteen out of twenty eight states are estimated to be
revenue surplus in 2007-08.The successful introduction of VAT
has contributed to increase in tax receipts of States. The
Statesrevenues in the coming years are likely to be buoyant
especially in the backdrop of uptrend in the tax revenues of the
Centre and consequent devolution to States. The award of the
Thirteenth Finance Commission is expected for the period from
2010 2015. These factors would be relevant for the purpose of
considering the capacity of the States to absorb the increase in
expenditure if they were to adopt the recommendations of this

Analysis of the
likely impact on

1.3.31 In estimating the impact on State finances, the

Commission has used a methodology similar to that followed
for the Centre.
As per information collected by the
Commission, out of 28 States, 20 States had adopted the
recommendations of the Fifth Central Pay Commission. It can,
therefore, logically be assumed, that these 20 States will adopt
the Sixth Central Pay Commissions recommendations as well.
The States which did not adopt the Fifth CPC recommendations
are Andhra Pradesh, Himachal Pradesh, Assam, Punjab, Kerala,
Karnataka, Meghalaya and West Bengal. Some States adopted
the Fifth CPCs recommendations with modifications. Out of the
States expected to follow the Sixth Central Pay Commissions
recommendations, only Goa and Tamil Nadu are estimated to
be in a marginally revenue deficit situation in 2007-08, as per the
RBI Report.


1.3.32 Assessment of the impact on State finances has been done

on a like-to-like basis as for the Centre. Accordingly, the
assumptions made for the purpose of this exercise are:
implementation in 2008-09, a percentage increase in pay and
allowances and pensions similar to that at the Centre and
distribution of arrears in the same manner as at the Centre. The
actual situation, however, in each State may vary depending
upon when the recommendations of the Fifth Central Pay
Commission were implemented and the extent to which they
were implemented. The revenue receipts have been projected
maintaining the ratio of States Own Revenues to Gross State
Domestic Product as in the past. The tax devolution from the
Centre is projected to increase in the same manner as the
Centres tax revenues. The ratio of expenditure on pay and
allowances and pensions to the projected revenue receipts has
been worked out as for the Centre and a similar comparison
made to estimate whether the expenditure consequent upon the
Sixth CPCs recommendations is within this ratio. It is
observed that most of the States would be in a position to
meet the additional expenditure. States which do not reflect a
comfortable position as far as the increased expenditure is
concerned, can consider the options of :

deciding on a date of implementation different from that

of the Centre,

staggering the payment of arrears suitably,

generating additional tax and non-tax revenues,

compressing expenditures.